The stock market showed some weakness as Fitch Ratings downgraded U.S. sovereign debt to AA+ from AAA. However, the investing community denies these ratings and remains bullish on the economy. I would suggest being cautious when others are bullish, as high interest rates have impacted the profit margins of companies with high debt.
In this uncertain market, it’s better to avoid highly volatile tech stocks, even though they have low debt. Instead, go for stocks whose fundamentals are not much affected by the interest rate.
Two top TSX stocks to buy now and hold forever
The secret to getting richer is to invest in fundamentally strong stocks when others are selling. When you buy at the dip, you get that added advantage of the recovery rally that makes you richer than those who buy such stocks in a growing market. Two TSX stocks released their second-quarter earnings. They show strong growth ahead, but the bear market continues to pull the stock price down.
Bombardier stock
Business jet maker Bombardier (TSX: BBD.B) reported robust second-quarter earnings. At a time when other companies are seeing a decline in profits, Bombardier reported a US$10 million net profit reversing its $109 million loss in the same quarter last year. This growth comes as it improved its earnings before interest and tax (EBIT) margin to 14.6% from 6.5% a year ago.
Bombardier continues to have a healthy order backlog of US$14.9 billion. It used US$222 million of its cash flow to increase its manufacturing capacity and deliver on its order book. While the business is running smoothly, the debt is improving, as the company repaid debt maturing till 2024. It also maintained US$1.2 billion liquidity, sufficient to help the business jet maker pay its bills if the economy falls into a recession.
Even S&P Global Ratings acknowledged Bombardier’s improved business and upgraded its credit rating to B from B-. As you can see, the key elements like order backlog, cash, debt, and profits are in an upward trend and sustainable. However, the stock fell 8.55% as the overall market fell. It is a stock to buy at the dip and holds at least till 2025 to see some sizeable growth and continue holding, as it continues its turnaround rally.
BCE
Another diamond in the rough is BCE (TSX: BCE). The telco is falling with the market and has made a new 52-week low of $55.5. In its second-quarter earnings, there is a significant decline in net profit (-39.3% year over year) and free cash flow (-23.8% year over year). But these declines are because of non-recurring expenses.
For instance, BCE has been on accelerated capital spending for a faster 5G network rollout. So, the depreciation expense increased. (Think of it like this: when you buy a new car, its depreciation is high in the first two years.)
Moreover, BCE had to deduct a $377 million non-cash expense to fulfill an obligation to repurchase minority interest in a joint-venture equity investment. This one-time expense pulled down net income. Its free cash flow (FCF) fell because of the timing of working capital and capital spending. It expects to receive over $600 million in the second half, reversing the FCF decline and achieving 2-10% FCF growth in 2023.
BCE is also selling off some of its low-growth Bell Media assets to reduce costs. This restructuring could lead to one-time severance pay charges from the layoffs. But it would enhance the telco’s overall operating efficiency.
Moving to the debt angle, BCE has manageable debt spread over 12.4 years bearing a weighted average interest of 2.96%. The company has also increased its liquidity to $4.4 billion, sufficient to help the telco withstand a recession.
Buying BCE stock at the dip
If you buy BCE stock at the current levels, you can lock in a 6.97% dividend yield. And given its strong fundamentals, the telco can sustain its $3.87 dividend per share and even grow it as the restructuring and 5G investment improves profit margins.
